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SPACs
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The New Bubble: SPACs

Special-purpose acquisition companies or SPACs, or empty-shell companies, or blank-check companies have been around since the early 90s.  Lately, they have been getting a lot of attention from structured finance experts, celebrities, and athletes.  SPACs even have their own hip-hop song–Spac Dream by Cassius Cuvee.  

What is SPAC? Why is it so popular now, and should the middle class or retail traders put their money in them? 

What is SPAC?

SPAC is another way for private companies to go public. Blank-check companies have no operating business or assets on their balance sheets, so it’s less costly for them to go public. 

A SPAC raises money through an initial public offering (IPO) to acquire an operating business. The shareholders, who have to be accredited investors, often don’t know which company the SPAC will target and purchase.  The SPAC has 2 years to purchase a company or return all funds to investors.

According to the Security and Exchange Commission (SEC), to be an accredited investor, a person must have an annual income exceeding $200,000 ($300,000 for joint income) for the last two years or a net worth of $1 million without the value of the person’s primary home.

Why Is It So Popular Now?

SPACs are popular now because of the perpetual bull markets and cheap money facilitated by central banks worldwide.  Money is cheap, and interest rates are extremely low. Investors have been struggling to find steady returns on their traditional investments.   Investors who are seeking yields from anywhere are boosting SPACs.

Blank-check companies are listed on exchanges, and prominent investment banks such as Barclay PLC, JPMorgan, and Citigroup are underwriting the deals.  Investors see them as part and parcel of the equity market, but both pre and post-merger inventors need to be cautioned.  

SPAC investors must have a higher risk tolerance than traditional equity investors. The SPAC game is not for the fundamentalists, who like to assess business models and forecast cash flows.  Not only it bypassed the legal hurdles and rigorous regulatory of traditional IPOs, and would-be investors will not have enough financial dataset to make rational decisions even post-merger.

The Manager or sponsor’s expertise might be the only important information available to potential SPAC investors, especially pre-merger investors.   They need to conduct an oppo-research on the SPAC’s sponsor if they can.  Sponsors usually get up to 20% of the company’s shares.

Best Performing SPACS in 2020

There were 450 IPOs in the United States in 2020.  248 out of 450 or 55% of them were SPAC IPOs, raising nearly $84 billion.  Below are the top-performing SPACs of 2020:

TOP PERFORMING SPACs of 2020 
SPAC TARGET COMPANY IPO DATE SYMBOL RETURN
Diamond Eagle Acquisition DraftKings 43945 DKNG 687%
Kensington Capital Acquisition QuantumScape 44162 QS 501%
GHL Acquisition Corp Iridium Holdings  39479 IRDM 570%
DD3 Acquisition Corp Betterware 43903 BWMX 585%
DFB Healthcare Acquisitions Corp AdaptHealth Holdings LLC 43780 AHCO 276%

2021 And Beyond

In the first 10 weeks of the year, there are already 228 SPAC IPOs, raising more than $70 billion. Clover Health, Billtrust, ChargePoint Holdings all merged with SPACs this year. 

With nearly 400 empty-shell companies seeking acquisition, 2021 is at a pace to beat the number of 2020 SPAC IPOs. 

Conclusion

Institutional, accredited, and retail investors will continue to seek higher yields and put their money in digital currency, SPACs, or any other asset class that promises to yield higher returns.

Unlike digital currencies that haven’t yet experienced a bear market.  SPACs have.  One SPAC went public in 2003.  According to SPAC Analytics, by the end of 2007, 144 of them followed suit and raised more than $18 billion.  Dozens of them went bankrupt during the 2008 financial crisis. 

The Financial Crisis of 2008 was a black swan. It even took out Lehman Brothers with nearly $700 billion in assets.  However, SPAC investors can still learn from that nightmarish moment in SPAC history.

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